economic business 1

Topics: Costs, Economics, Inflation Pages: 11 (2534 words) Published: October 17, 2014
Part A – Microeconomics:
Question 1:
Indicate whether each of the following changes in price cause total revenue to increase, decrease or remain unchanged? Explain why. (2 marks each) a Price falls and demand is elastic;

b Price rises and demand is elastic;

c Price falls and demand is unitary elastic;

d Price rises and demand is unitary elastic;

e Price falls and demand is inelastic.

Question 2:
a Define, describe and illustrate with a diagram, one opportunity cost for a person starting up their own business (2 marks)

b Explain the difference between implicit and explicit costs (2 marks)

c Explain the difference between accounting profit and economic profit (2 marks)

d How do opportunity cost, explicit cost, implicit cost, accounting profit and economic profit relate to each other? (4 marks)

Question 3:
a Why would consumers prefer that the government tax products with elastic, rather than inelastic demand? (5 marks)

b Opponents of increasing the tax on manufacturers of cigarettes argue that the big tobacco companies just pass the tax on to the consumers. Do you agree or disagree? Explain your answer with the assistance of a diagram. (5 marks)

Question 4:
The diagram on the left below illustrate an industry under oligopoly consisting of 10 equal-sized firms whilst the diagram on the right below indicates the price and quantity combination of one particular firm within the industry. Each of the firms produces an identical product.

(a) Assuming that the firms form a cartel, what price will the cartel choose if it wishes to maximise overall profits for the cartel?

(b) What total output must the cartel produce in order to maintain this price?

(c) To what output will an individual firm be restricted if this price is to be maintained (assume all firms are permitted to produce the same level of output)?

(d) If the other firms stick to this output, how much would an individual firm be tempted to produce if it wished to maximise its own profit at the agreed price?...............................

(e) If it undercut the cartel price, what price and output would maximise its profit (assuming that the other members did not retaliate?
(2 marks each)

Question 5:

(a) Explain and illustrate with a diagram the impact of external costs on resource allocation (2 marks for diagram plus 2 marks for explanation);

(b) Explain and illustrate with a diagram the impact of external benefits on resource allocation (2 marks for diagram plus 2 marks for explanation);

(c) Why are public goods not produced in sufficient quantities by private markets? (2 marks)

Question 6:
(a) Consider this statement: ‘When marginal revenue equals marginal cost, total cost equals total revenue and the firm makes zero profit’. Do you agree or disagree? Explain. (5 marks)

(b) Consider this statement: ‘A firm should increase output when it makes a profit’. Do you agree or disagree? Explain. (5 marks)

Question 7:

(a) Assuming identical long-run cost curves, draw two graphs and indicate the price and output that result in the long-run under monopolistic competition and under perfect competition (2.5 marks for each graph plus 2 marks for the explanations, total 7 marks)

(b) Evaluate the differences between these two market structures. (3 marks). Part B – Macroeconomics
Question 8:
Discuss and illustrate with diagrams, the role and importance of money in an economy. Your answer should include a discussion on the following: a Bank creation of money;

b Demand for money;

c Money supply;

d Determination of the equilibrium interest rate in the money market.

Question 9:
a Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for diagrams and 2.5 marks for explanation)
b Provide (describe) two (2) causes of each type of inflation.
(2.5 marks for 2 demand-pull...
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